How do you factor in maintenance, repair, and upgrade costs into your TCO analysis?

If you are planning to invest in capital equipment for your business, you need to consider more than just the initial purchase price. You also need to factor in the ongoing costs of maintenance, repair, and upgrade that will affect the total cost of ownership (TCO) and the return on investment (ROI) of your equipment. In this article, you will learn how to evaluate these costs and how to use them to make informed decisions about your capital equipment purchases.

1 What is TCO and ROI?

TCO and ROI are two key metrics that help you assess the value and performance of your capital equipment. TCO is the sum of all the costs associated with owning and operating a piece of equipment over its useful life. It includes the purchase price, installation, training, operating, maintenance, repair, upgrade, and disposal costs. ROI is the ratio of the net income generated by the equipment to the total investment cost. It measures how much profit or benefit you get from using the equipment compared to how much you spend on it.

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2 Why are TCO and ROI important?

TCO and ROI are important because they help you compare different options and choose the best one for your business. By calculating the TCO and ROI of each option, you can see the true cost and value of your equipment over time. You can also identify the factors that affect your TCO and ROI, such as the equipment's lifespan, reliability, efficiency, quality, and compatibility. This way, you can optimize your equipment selection and management to maximize your profitability and productivity.

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3 How to calculate TCO and ROI?

To calculate TCO and ROI, you need to collect and analyze data on the costs and benefits of your equipment. You can use spreadsheets, software, or online tools to help you with this process. Firstly, estimate the purchase price, installation, training, operating, maintenance, repair, upgrade, and disposal costs of each equipment option over its expected lifespan. Historical data, supplier quotes, industry benchmarks, or expert opinions can be used to estimate these costs. Secondly, estimate the net income generated by each equipment option over its expected lifespan. Sales projections, market research, customer feedback, or performance indicators can be used to estimate this income. Thirdly, calculate the TCO of each equipment option by adding up all the costs over its lifespan. Fourthly, calculate the ROI of each equipment option by dividing the net income by the total investment cost. Lastly, compare the TCO and ROI of each equipment option and choose the one that has the lowest TCO and the highest ROI.

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4 How to factor in maintenance, repair, and upgrade costs?

Maintenance, repair, and upgrade costs are some of the most significant and variable costs that affect your TCO and ROI. To factor in these costs, you need to consider the maintenance schedule and requirements of your equipment, as well as its repair history and warranty. It is also important to evaluate the upgrade potential and compatibility of your equipment to improve its performance, functionality, or efficiency. Furthermore, you should follow the manufacturer's recommendations and industry standards to keep your equipment in good condition and prevent breakdowns. Additionally, you should track the frequency and severity of repairs and the associated costs, check the warranty coverage and terms of your equipment, and plan for any potential repairs after the warranty expires.

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David Newton, MBA

Catalyst for Change in Healthcare Capital Planning and Sourcing
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Digging into maintenance and upgrade costs is crucial for your TCO and ROI, but let's not just follow the OEM script blindly. Consider this: Access to federated insights can illuminate biases in OEM recommendations. By pooling together comprehensive capital data—combining CMMS insights on maintenance history and utilization, with layers of cybersecurity, financial transactions, and contract standards—you get a fuller picture. Directly linking warranty or service agreements to assets when planning for capital refreshes is not just smart; it’s strategic. This way, you're not just managing assets; you're optimizing them for your organization's unique narrative.

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5 How to optimize your TCO and ROI?

To optimize your TCO and ROI, you need to adopt a proactive and strategic approach to your capital equipment management. Before buying any equipment, research and analyze different options and scenarios to select the one with the best TCO and ROI. Negotiate with suppliers and vendors for discounts, incentives, financing options, or value-added services. Monitor and measure equipment performance and costs regularly to identify any issues or opportunities for improvement or optimization. Maintain and repair equipment properly and promptly following best practices and standards to extend its lifespan and reduce downtime and waste. Upgrade or replace the equipment when necessary and beneficial, considering its condition, performance, and market demand.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Robert J. Steele

Chief Growth Officer @ Legendary Supply Chain | Co-Founder
(edited)
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It is important to understand useful life for your capital asset strategy so you have a clear timeline for building your total cost of ownership analysis. Understanding how open and accessible the serviceability for the product is will be crucial for deciding the long-term cost of servicing the device versus manufacturers with a proprietary design that are going to make your costs much higher over the lifecycle of the equipment.

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How do you factor in maintenance, repair, and upgrade costs into your TCO analysis?

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1 What is TCO and ROI?

2 Why are TCO and ROI important?

3 How to calculate TCO and ROI?

4 How to factor in maintenance, repair, and upgrade costs?

5 How to optimize your TCO and ROI?

6 Here’s what else to consider

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